US UK Tax Returns Preparation After the UK CGT Rate Rise

US UK tax returns preparation for a US citizen living in Britain changed character on 30 October 2024, when the UK raised its main Capital Gains Tax rates from 10% and 20% to 18% and 24%. For a higher-rate taxpayer selling a share portfolio, private company shares or an investment property, the UK charge on a typical gain now sits above the top 20% US long-term capital gains rate. In most cases that means the UK tax, claimed as a Foreign Tax Credit on Form 1116, absorbs the regular US tax on the gain and leaves excess credits behind, while the 3.8% Net Investment Income Tax can still fall due in the United States.

The detail is where the money is won or lost: the two countries measure the gain in different currencies, tax it in different years, classify it under different rules and apply reliefs that do not line up. In the returns we prepare for internationally mobile investors, the rate rise has not reduced the work on the US side. It has moved it, away from finding enough UK tax to cover the US bill and toward managing surplus credits, the NIIT exposure and the exchange-rate distortions that can turn a sterling gain into a dollar loss or the reverse.

What Are the UK Capital Gains Tax Rates Now?

The government policy paper at https://www.gov.uk/government/publications/changes-to-the-rates-of-capital-gains-tax/capital-gains-tax-rates-of-tax sets out the change. For disposals on or after 30 October 2024, the lower main rate rose from 10% to 18% and the higher main rate rose from 20% to 24%. The residential property rates, which were already 18% and 24%, stayed where they were, so shares, investment property and most other chargeable assets are now taxed on the same two-rate scale. Which rate applies still depends on how much of your basic rate Income Tax band is left once your taxable income is counted.

• Main rates for individuals: 18% on gains falling within the unused basic rate band and 24% on gains above it, for disposals on or after 30 October 2024
• Residential property: 18% and 24%, unchanged by the Budget and now identical to the main rates
• Business Asset Disposal Relief and Investors' Relief: 10% before 6 April 2025, 14% for qualifying disposals on or after 6 April 2025, and 18% for qualifying disposals on or after 6 April 2026
• Annual exempt amount: £3,000 for the 2026 to 2027 tax year, as shown at https://www.gov.uk/capital-gains-tax/rates
• Basic rate band for 2026 to 2027: £37,700, which for most high earners is already used up by salary or other income, pushing their gains straight to 24%

For the readers of this site, the practical position is simple. A high earner who sells listed shares, a holding in a UK private company that does not qualify for relief, or a let property is paying 24% on almost all of the gain above the £3,000 allowance. A founder or long-standing shareholder who qualifies for Business Asset Disposal Relief, or an external investor who qualifies for Investors' Relief, now pays 18% on qualifying gains, up from 10% only two tax years ago.

Do Contracts Signed Before the Rate Change Escape the Higher Rates?

Usually not, and this is a gap in most guides. UK law treats a disposal under an unconditional contract as taking place when the contract is made, so the policy paper added anti-forestalling rules. An unconditional contract entered into before 30 October 2024 but completed afterwards is caught by the new main rates. For Business Asset Disposal Relief and Investors' Relief, contracts made between 30 October 2024 and 5 April 2026 that complete on or after 6 April 2025 are also caught. There are exceptions where the parties can show the contract was not entered into to gain a tax advantage from the timing rule, with a stricter wholly commercial test for connected parties, and a statement is required where the gain exceeds £100,000 and an exception is relied on.

This matters for the US return because the date that fixes the UK rate is not always the date that fixes the US sale. If a company sale signed in one period and closed in another, the UK may treat the disposal as occurring at exchange while the US closing documents, settlement statement and exchange-rate date may point to completion. Both dates need to be pinned down in the file before either return is finalised, or the gain ends up in different years and the credit misses its target.

How Does the US Tax the Same Gain?

A US citizen is taxed on worldwide gains regardless of residence. According to IRS Topic 409 at https://www.irs.gov/taxtopics/tc409, an asset held for more than one year produces a long-term gain, and most net capital gain is taxed at 0%, 15% or 20% depending on taxable income and filing status. Short-term gains on assets held one year or less are taxed as ordinary income. Two special rates sit above the standard scale: up to 28% on collectibles and the taxable part of qualified small business stock gain, and up to 25% on unrecaptured section 1250 gain, which is the depreciation element on the sale of real property such as a let flat.

On top of that sits the Net Investment Income Tax. The IRS questions and answers at https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax confirm a 3.8% rate on net investment income above modified adjusted gross income thresholds of $250,000 for married filing jointly, $125,000 for married filing separately and $200,000 for single filers. Those thresholds are not indexed for inflation. Gains on stocks, bonds and funds, and gains on investment real estate including a second home, are within the charge.

Why Does UK Tax Now Usually Exceed the US Tax on a Gain?

Put the two scales side by side. A higher-rate UK taxpayer now pays 24% on a chargeable gain, while the highest standard US long-term rate is 20%. Before October 2024 the UK higher rate on shares was also 20%, so the two were broadly matched and small differences in currency, timing or allowances often left a US top-up to pay. Today the UK charge on a share or property gain is four percentage points higher than the US regular rate, which is a material margin on a seven-figure disposal.

The Foreign Tax Credit is a dollar-for-dollar credit against US income tax for income tax paid to another country, claimed by individuals on Form 1116, as the IRS explains at https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit on its credit overview page. Because the credit for a category of income cannot exceed the US tax on that income, a 24% UK charge set against a 20% US charge leaves the US regular tax on the gain fully covered and creates an excess of foreign tax. The Form 1116 instructions at https://www.irs.gov/instructions/i1116 state that capital gains not related to the active conduct of a trade or business are generally passive income, so a portfolio or investment property gain normally lands in the passive category basket alongside dividends and interest.

There is one important exception to the neat comparison. Gains that qualify for Business Asset Disposal Relief or Investors' Relief are taxed in the UK at 18%, which is still below the 20% top US rate. A US citizen founder selling a qualifying UK trading company therefore often faces a residual US charge of roughly two percentage points on the gain even after a full credit, plus the NIIT question discussed below. The relief that delivers a saving in the UK partly hands it back to the US Treasury, and that should be modelled before a sale, not discovered on the 1040.

What Happens to Excess Foreign Tax Credits?

Excess credits are not lost immediately. IRS Publication 514 at https://www.irs.gov/publications/p514 explains that unused foreign taxes are first carried back and can then be carried forward to the 10 years following the year in which they arose, within the same separate category. A passive basket surplus from a large sale can therefore shelter US tax on future passive income, such as UK dividends or interest, where the UK tax on that income is lower than the US tax.

In practice, though, many UK resident Americans already pay more UK tax on their passive income than the US charges, so the carryforward simply accumulates and expires. The value of a surplus depends on whether there will be low-taxed passive income in the carryover window. That is a planning conversation rather than a box on a form, and it is one reason we track the passive basket balance year by year in a carryover schedule rather than rebuilding it each spring.

• Identify the category: most portfolio and property gains are passive, while gains connected to an active trade may sit in the general category
• Apply the capital gain rate adjustment: the Form 1116 instructions require foreign source capital gains taxed at preferential US rates to be scaled down in some cases, multiplying by 0.4054 for gains at 15% and 0.5405 for gains at 20%, unless the adjustment exception applies, which shrinks the limitation and enlarges the surplus
• Convert the UK tax correctly: for taxes credited when paid, the instructions use the exchange rate on the day the UK tax was paid
• Record the carryback and carryover: track unused passive basket tax by year so it is used before it expires
• Watch redeterminations: if HMRC later changes the UK tax, the IRS treats this as a foreign tax redetermination, generally requiring an amended return

Can UK Tax Be Credited Against the 3.8% Net Investment Income Tax?

Under the IRS position, no. The NIIT questions and answers state that foreign income tax credits may not be used to reduce your NIIT liability. The NIIT is imposed by a separate chapter of the Internal Revenue Code from the regular income tax, and the general credit provisions are treated as applying only to the regular tax. The IRS does note one partial route: if foreign income taxes are deducted rather than credited, some or all of the deduction may reduce net investment income, but for a high-net-worth seller giving up the credit on the regular tax is rarely worth it.

So a US citizen in the UK with a large gain can end up with a UK bill at 24%, no US regular tax after the credit, excess passive credits, and still a 3.8% NIIT charge in the United States. Some taxpayers take a treaty-based position that the US-UK income tax convention's relief from double taxation should extend to the NIIT. That argument turns on the wording of the specific treaty and has been litigated under other treaties with mixed outcomes. It is a disclosed position, not a default, and in the returns we prepare it is assessed case by case with the treaty-based return position disclosure the IRS requires, rather than assumed. The IRS view, as published, is that the credit does not apply.

How Does the Treaty Help Source the Gain for the Credit?

The Foreign Tax Credit limitation only allows credit up to the US tax on foreign source income. That raises a question many guides skip: is a UK resident American's gain on shares actually foreign source under US rules? The US source rules for gains on personal property look at the seller's residence, with special tests for citizens living abroad, and the answer is not always the intuitive one. Where the domestic rules would treat income as US source, the US-UK treaty contains provisions designed to re-source income that the UK is entitled to tax so that relief from double taxation can work.

Publication 514 treats income re-sourced by treaty as its own separate category for the limitation, which means it is computed on a separate Form 1116 rather than blended with other passive income. Getting the source analysis right is what decides whether the UK tax on a large gain is fully usable at all. A return that simply drops a UK share gain into the passive basket without checking the source rules can understate or overstate the allowable credit, and on a multi-million pound sale the difference is significant.

How Do the 6 April and 1 January Tax Years Affect the Credit?

The UK tax year runs from 6 April to 5 April, while the US uses the calendar year. A gain realised in November 2026 falls into the UK 2026 to 2027 tax year and the US 2026 calendar year. A gain realised in February 2027 falls into the same UK tax year but the US 2027 year. The UK tax on both disposals is computed together on one Self Assessment return, so the UK figure has to be split between the two US years by reference to the gains that produced it.

Payment timing adds another layer. Under the paid basis, the UK tax is credited in the US year in which it is actually paid, which for a non-property gain is usually after the UK tax year ends, and therefore often in a later US year than the gain. That can leave the gain year with US tax and no credit, followed by a year with credit and no matching income, relieved only through the carryback. The accrual basis, which Form 1116 allows individuals to elect, generally aligns the credit with the year the tax relates to and uses an average exchange rate for the year, with exceptions. For a large disposal it is usually the cleaner approach, but the election has consequences for later years and should be made deliberately.

Can a Sterling Gain Be a Dollar Loss?

Yes. Publication 514 states that US income tax is imposed on income expressed in US dollars. The US gain is the dollar value of the sale proceeds minus the dollar cost basis, each translated at the exchange rate when that event happened. HMRC computes the gain entirely in sterling. When the pound moves between purchase and sale, the two gains diverge.

Take an illustration with assumed exchange rates. A property bought for £500,000 when the pound bought $1.70 has a dollar cost of $850,000. Sold years later for £520,000 when the pound buys $1.25, it produces $650,000. HMRC sees a £20,000 gain and charges UK tax on it. The IRS sees a $200,000 loss. The UK tax paid on that gain has no matching US gain to credit against, and the US loss is subject to the usual US capital loss rules. Reverse the currency move and the opposite happens: a modest sterling gain becomes a much larger dollar gain, and the UK tax may not cover the US tax at all, even at 24%.

Mortgaged property adds a further wrinkle, because repaying a sterling loan can create a separate US foreign currency gain or loss on the debt that the UK does not recognise. And for anyone who holds UK-domiciled pooled funds, the US passive foreign investment company rules on Form 8621 can tax the gain at ordinary rates with an interest charge, which the UK rate rise does nothing to cover.

When Is the UK 60-Day Property Return Due?

UK residents who sell UK residential property, such as a buy-to-let flat or a second home, must report and pay any Capital Gains Tax due within 60 days of completion, as set out at https://www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020 on GOV.UK. The clock runs from completion, the date you stop owning the property, not from exchange of contracts, although both dates must be reported. A UK resident whose total gains are below the annual allowance does not need to report online, but late reporting or payment otherwise brings interest and penalties.

For the US return, the 60-day payment is helpful in one way and awkward in another. Because the UK tax is paid soon after completion, often in the same calendar year as the sale, a paid-basis credit can land in the right US year. But the 60-day figure is a provisional calculation, later finalised on the Self Assessment return, so if the final UK tax differs, the US credit may need adjusting as a redetermination. On the US side, a let property also brings depreciation recapture at up to 25% on the unrecaptured section 1250 portion, which can sit above the UK charge on that slice of the gain.

Worked Example: A Portfolio Sale After the Rate Rise

The following is an illustration only, using an invented taxpayer, round numbers and assumed exchange rates. It is not a real case and it simplifies the US bracket calculation. Alex, a US citizen resident in London and a UK additional rate taxpayer, files as single in the US and has US modified adjusted gross income well above $200,000. In 2018 Alex bought a portfolio of listed shares for £400,000 at an assumed rate of $1.30, a dollar basis of $520,000. In November 2026 Alex sells the portfolio for £1,000,000 at an assumed rate of $1.25, proceeds of $1,250,000.

• UK gain: £600,000 less the £3,000 annual exempt amount gives £597,000, taxed at 24% because Alex's income has used the basic rate band, so UK Capital Gains Tax is £143,280
• UK tax in dollars: assuming it is paid at $1.25, about $179,100
• US gain: $1,250,000 less $520,000 gives $730,000, long-term, assumed for this illustration to be taxed entirely at 20%, so US regular tax on the gain is about $146,000
• Foreign Tax Credit: on these assumptions and subject to the source analysis and Form 1116 adjustments, the credit eliminates the $146,000 and leaves roughly $33,100 of excess passive basket tax to carry back and then forward
• Net Investment Income Tax: 3.8% of $730,000 is about $27,740, which under the IRS position remains payable because the foreign tax credit cannot reduce it

Three lessons come out of these illustrative numbers. First, the dollar gain is larger than the sterling gain because the pound weakened over the holding period, which is why the dollar computation has to be built from purchase-date rates rather than by converting the sterling gain at the sale-date rate. Second, despite paying almost $180,000 in UK tax, Alex still owes around $27,740 in the US through the NIIT. Third, the $33,100 surplus only has value if Alex later has low-taxed passive income, so the carryover schedule needs maintaining. If the same shares had qualified for Investors' Relief at 18%, the UK tax would have been lower than the US regular tax and a residual US top-up would replace the surplus.

US UK Tax Returns Preparation: What to Gather Before You Sell

The best US UK tax returns preparation for a large disposal starts before the sale, because the timing of exchange and completion, the choice of paid or accrual basis, and the order in which assets are sold all affect both returns. Once the transaction closes, these are the records we ask for to prepare both sides together:

• Purchase and sale contract notes or completion statements for every asset, showing trade dates, settlement dates and, for property, exchange and completion dates
• Original cost in sterling with the acquisition date, plus any later additions, share reorganisations or improvement costs, so the dollar basis can be built at historic rates
• Evidence of any Business Asset Disposal Relief or Investors' Relief qualification, and any contract dated around 30 October 2024 or 6 April 2025 that the anti-forestalling rules could reach
• The UK 60-day property return and payment confirmation, and the final Self Assessment calculation showing the Capital Gains Tax charged
• Prior-year Form 1116 carryover schedules by category, so surplus credits are used in the right order
• A list of any UK pooled funds held, for the passive foreign investment company review
• For let property, the depreciation history used on prior US returns, needed for unrecaptured section 1250 gain

The UK rate rise has changed the arithmetic of cross-border selling, but it has not made the US return any simpler. A UK charge of 24% will usually cover the US regular tax, yet the NIIT, the BADR shortfall, the source and category rules, the mismatched tax years and the currency effects can each leave an unexpected US bill or a wasted credit. Treating US UK tax returns preparation as one coordinated exercise, with both computations built from the same transaction file, is how a high-net-worth seller pays the tax that is genuinely due in each country and no more.

Related reading and tools

• US Tax Services & IRS Compliance
• UK Tax Services
• IRS Streamlined Filing
• UK Income Tax Calculator
• US Federal Income Tax Calculator

Every situation is different. Book a cross-border tax consultation to discuss how these rules apply to you.

Authoritative sources

IRS — Streamlined Filing Compliance Procedures

FinCEN — Report of Foreign Bank and Financial Accounts (FBAR)

HM Revenue & Customs

GOV.UK — Tax on foreign income

IRS — Foreign Earned Income Exclusion

IRS — Foreign Tax Credit

ICAEW

Chartered Institute of Taxation (CIOT)

AICPA

MoneyHelper (UK)